Saudi inflation at new high, 'may accelerate'

Riyadh, June 14, 2010

Inflation in Saudi Arabia may accelerate further in the coming months, after hitting a one-year high of 5.4 per cent year-on-year in May on rents and food prices, economists said on Monday.

Price pressures are seen rising again this year as oil exporters recover but inflation is expected to stay in single digits across the Gulf, the world's top oil-exporting region.

Inflation in the biggest Arab economy started picking up again after slowing to a two-and-a-half year low of 3.5 per cent in October. It stood at 4.9 per cent in April, which is still well below a record high of 11.1 per cent seen in July 2008.

Saudi consumer prices now stand at the highest level among six Gulf Arab oil producers.

Month-on-month, prices in the world's top oil exporter rose 0.6 per cent in May, a seven-month high, after a 0.3 per cent increase in April, data showed late on Sunday.

Housing costs, which account for 18 per cent of the basket, jumped by 1.1 per cent month-on-month in May, their fastest pace in the last 11 months, and were up 9.4 per cent on the year.

'We forecast that rental pressure will continue to increase with the strengthening in economic activity, while food prices will increase in August with the holy month of Ramadan,' said Monica Malik, chief economist at EFG-Hermes in Dubai.

She raised her 2010 inflation forecast for the kingdom to 5.2 per cent from 4.9 per cent after the May data.

Food prices, which have the largest 26 per cent weight in the basket, fell by 0.1 per cent month-on-month in May, the same decline as in April. They are 5.4 per cent higher from May 2009.

Transport and communications, the third-largest basket item, edged up by 0.1 per cent, the data showed.

Prices to rise

John Sfakianakis, chief economist at Banque Saudi Fransi Credit Agricole, said he also might have to revise his full-year prediction of 4.7 per cent if the current trend persists.

'The price build-up we are witnessing is of little surprise and is expected to continue and peak during summer months,' he said.

In May, the Saudi Arabian Monetary Agency said inflation was likely to be steady in the second quarter and will be mainly driven by rising housing and food prices. SAMA Governor Muhammad al-Jasser said last month monetary policy was not the appropriate response for such supply shocks.

The central bank's tools to rein in inflation are limited by the riyal peg to the US dollar.

Finance Minister Ibrahim Alassaf told Reuters last month that the kingdom had no plan to raise government spending beyond its 2010 plan to keep inflation under control.

The Gulf country launched a $400 billion five-year plan in 2008, the largest stimulus relative to gross domestic product among 20 leading nations. – Reuters